Understanding new-fangled money – from blockchain to mini-BOTs

Much confusion comes to a head even among those who should be more articulate when there is talk of money outside micro-economics. Most recently with the Libra being touted by Facebook and Friends and with mini-BOTs in Italy.

My purpose here is to offer a neglected approach with the
intention of enabling a better understanding of what is happening, not the
detail. In particular, how mini-BOTs might be designed to defeat the objections
of Gresham’s Law, which says that bad money drives out good.

Essential features of money are often overlooked:

1) Money is, first and foremost, for paying taxes, which are
obligatory.

2) Money must circulate. The speed of circulation varies. For
a century, following Schumpeter, many economists have taken it as a constant:
it is not constant but has only been measurable by proxy, which is doubtless why
it came to be neglected in the first place.

3) Money is – becomes – a tool for planning (obligations and
claims).

4) Money, in the form of capital, becomes a means of
mathematically modelling possessions (or wealth).

Everything else follows from these features.

Historically, but also conceptually, money serves to pay
debts to the state. The state issues IOUs (acknowledges debt by issuing credit)
in return for goods and services, which its payees can then use in order to
obtain goods and services from other citizens (or subjects). The IOUs are
accepted because they are needed to pay taxes. This is the most important –
indeed, defining – feature of money.

Once in place, this circuit expands as it proves useful to
replace barter and to replace relationships of reciprocity. In contrast to
barter and reciprocity, money enables fine-tuning, precision, plus a vastly
wider circle of exchange.

Relationships of reciprocity involve the implicit
understanding that good turns will be returned some time in the future. It is
here that the planning aspect comes to the fore.

Money must circulate. None the less, it inevitably also
serves as a store of value. More precisely, as a temporary store of value.
Money stored long-term deteriorates, eventually becoming dead money, like grain
and precious metals or indeed, in bygone times, salt.

So it is better exchanged for farmland or a factory, which takes
it back into circulation. Hence money (banknotes, coins, or fiat on a bank
ledger) is converted into capital. Capital is not money, or rather, its
relationship to money (cash) is complex.

Capital can be converted to such fungible money, but only at
the margins and in accordance with due diligence and procedure. All the holders
of “capital” might change or perish overnight, for example in a revolution, but
only a marginal amount of capital can be converted into money (cash in hand,
cash at bank) at any one time.

If, say, a state were to expropriate everyone but compensate
them with money, the value of the currency would collapse.

This is one way in which money as a concept (rather than
money to spend) becomes a tool for mathematical modelling. Another is the
familiar creation of fiat money by non-state banks.

In order to purchase a tractor, one might mortgage the
farmstead. That is, the bank accepts the farmstead as collateral and issues
fiat money, confident that the tractor will increase productivity, which will
generate money, that can be returned to the bank (with interest).

On its return, this “money” is removed from the ledger and
is therefore destroyed. Hence money is being created and destroyed all the
time, which is perplexing for many people. Neither the tractor nor the
farmstead are destroyed but, without the intermediary, the tractor might never
have been created.

The “money” here is an accounting device. What it maps is
nonetheless real, or is a future which may be considered to be sufficiently
certain.

Having set the conceptual scene, we can now proceed to
reformulate matters. When the news media and politicians talk about debt, they
are talking, abstractly, about plans and the commitments (obligations) which go
hand-in-hand with planning.

Planning is always future-orientated. Think of an
appointments diary. One for years ahead, with more and more time slots taken.
As events unfurl, circumstances intervene necessitating some rescheduling. If
the appointments diary is none too full, this is manageable. No longer so if
every last time slot is taken.

As we cannot live day-by-day and do not relish
hand-to-mouth, we provide for contingencies, create projects and make
commitments. So some debt is good. That is, it is wise to use money to plan
ahead, which means issuing credit or accepting debt. The problems arise when we
overreach ourselves.

At a macro-economic level, they arise also from using one
way of thinking, which works perfectly in a micro-economic setting, in a wider
context where it breaks down.

When a Chancellor of the Exchequer puts a figure of a trillion
on the cost of combatting climate change, this may be rhetorically clever, but
it is conceptually meaningless.

Other figures, too, should be treated with great scepticism,
for instance, when there is talk of global GDP. (Quite apart from GDP being
contested as a modern measure of economic well-being.) In such cases, all that
is happening is that a greater portion of the human world (present and
projected) is being mapped mathematically. Thought is idling (Wittgenstein).

When money is seen as mapping possessions, it may be better
described as locked-in capital. All maps involve abstraction, which is to say
filtering out some aspects in order to achieve transparency or clarity elsewhere
(for example, in order to make it easy to use, the map of the London Tube ignores
distances. A map which modelled everything would have to be as big as what it
was modelling.)

To recapitulate: The core feature of money is that it is
legal tender for the payment of taxes. Taxes must be paid periodically, so
taxpayers require a steady supply of money. This is what gives money
credibility.

Subsequently, money
proves useful as a replacement for barter and for implicit promises or
reciprocity. Hence it circulates. Problems arise from the scope and speed of
circulation. As its speed of circulation decreases, money comes to resemble a
store of value, but long-term it is unreliable as that.

It is then wise to convert it into capital, which is
illiquid except at the margins. Capital involves a (mathematical) modelling of
possessions. Until such time as there are taxes (property taxes) to be paid, or
debt to be repaid, the modelling is superfluous, at best an exercise in
curiosity. Like assigning names to stars other than for purposes of navigation.

On the basis of this understanding of fundamentals it is
possible to come to a judgement on new-fangled forms of money such as
cryptocurrencies, but also what are misleadingly called parallel currencies
such as that now proposed for Italy.

Readers will be aware of the plan to introduce mini-BOTs.
This has been widely reported, for example.

It says that mini-BOTs would be short-term Treasury bills (non-interest-bearing,
tradeable securities) issued to pay for government services or reimburse tax.
In turn, citizens could use them to pay their taxes or even pay for services or
goods provided by the state, including petrol.

The certificates would quickly become accepted more widely
and used as a form of money to be spent anywhere, to buy anything.

Going this far, BOTs would indeed constitute a parallel
currency and therefore violate EU law. It would be a first step towards
possibly replacing the euro. In the eyes of many observers, the introduction of
such BOTs would be a necessary and welcome step in the right direction, but
that controversy is not the subject of these reflections.

Note that the mini-BOTs are clearly conceived not to
constitute stores of value (and so not for trading on international markets)
except very short-term. The store-of-value function is well-served by the euro.

It is in this sense that Gresham’s law of “bad” money
driving out “good” would apply. Obviously, if you have a choice of whether to
pay your taxes or something else in mini-BOTS or euros, you would (at present)
use the former and save your euros for a rainy day.

But this need be no bad thing, at worst an inconvenience. In
any case, many people with euros will not have mini-BOTs in abundance. All
Gresham’s law says is that money with restrictions as a store of value (paper
or base metal maybe) is spent in preference to money (like silver coinage)
which enjoys credibility as a store of value. Hence “bad” money circulates more
than “good”.

In 2015, in an essay in my German book KlasseVerantwortung, I
made a proposal which deliberately stopped far short of the scheme currently
under discussion (“Sich schleichen aus der Eurokrise”). This was for local
authorities to issue similar certificates, but such that they would only become
legal tender for payment of local (not national) taxes after a delay of, say,
two years.

Hence there would be an incentive to use them in the local
economy, it being understood that the local economy, to the extent that it is
sustained by local consumers, was constituted mainly of services, many of them
of a personal kind.

The thought was for this currency to facilitate trade
between individuals or families such that people would always have money for the
myriad small outgoings that make for zest for life and a vibrant local economy.

Nearly everyone would have money to pay hairdressers,
restaurant and café personnel, gardeners, baby-sitters, tuition, et cetera.
They would need euros for pay for coffee (imported), new (but not second-hand)
coffee machines, electricity and petrol, in a word for tangibles such as those
produced by industrial processes and typically imported from afar (the other
end of the country or abroad).

My proposal was targeted at achieving a noticeable
alleviation of poverty without imagining that it could solve the deeper problems
of the wider economy.

One objection to my scheme from the viewpoint of the EU is
that it would thwart the collection of VAT. I remind readers here that VAT is
enshrined in Holy Writ in Leviticus Chapter Six, verse 66. Its purpose in being
imposed EU-wide on services is to complicate the lives of small traders,
discourage discretionary spending and promote deep grey markets.

But undermining VAT was not the primary purpose of my
proposal. It was to accelerate the circulation of a form of money in a largely
closed circuit and hence boost local well-being.

It is this aspect of semi-closed circuits that is too little
articulated when big money is discussed. With the euro (but also with other major
denominations) we have a single currency and its central management (via quantitative
easing, interest rates, inflation targets etc.) to attend not only to
geographically and economically disparate regions but also for the myriad mini-economies
that constitute a whole society.

It is a matter of resource allocation, but resources are not
interchangeable, or only so at the margins and then gradually. The notion of
Austerity gives rise to the impression that spending can be switched substantially
between the different grand areas of public or private concern (healthcare, education,
defence, policing, courts, other welfare, etc.). It cannot.

Not because it would be publicly unacceptable (which it
would), but because it confuses a means of measurement (money) with what the
money is mapping.

There is therefore regularly a need to step back from the
accounts and reflect on what the accounts are about. This change of focus puts
things into perspective. Inflation targets can be seen as a clumsy attempt at
controlling the speed of monetary circulation.

However, the best way to speed up circulation, if that is
what is desired, is, of course, is to increase the money available to the poor
since they will not use it as a store of value.

The worst way to speed up circulation is to hand the money created
(via quantative easing) to those who risk using it not for consumption or even
boosting the means of production, but for the purchase of assets.

Here the reminder that this is to convert money into
capital, which means simply that more of the world is mapped, or more future time
slots are filled, or that, in some semi-closed circuits, prices change (upward)
while the prices in other semi-closed circuits stagnate.

One task of politics is to attend to those semi-closed
circuits and ensure that they are provided with enough but not too much
liquidity (or cash flow). When this task is left entirely to take care of
itself other imbalances emerge. Think (medically, metaphorically) of the body,
the circulation of the blood to very different organs, and trace elements.

To come to some conclusions about the core topics.

One scenario is that mini-BOTs might be implemented as a parallel
currency and therefore possibly as a first step to exiting the euro but also,
possibly, simply as a measure to boost the Italian economy, a measure that
could be withdrawn a few years hence.

A quite different scenario is the one I proposed for revitalising
a local economy, with its key elements being a delay before the currency could
be used to pay taxes and a restriction on the type of tax payment it could be
used for.

During the crisis in Greece, Yanis Varoufakis made a rather different
proposal, rejected by the EU Commission which, logically, also involved the
settlement and refund of taxes. I personally consider the approach at the time
of the EU Commission to have been reprehensible in the extreme, but that is
another topic.

Varoufakis is against the Italian mini-BOTs, for which he
has his own reasons, which I do not concur
with.

A few words on how, on the basis of the principles
elucidated above, I see cryptocurrencies. They cannot be used to pay taxes, any
more than taxes can be paid with tulip bulbs. They have become fashionable in
some circles, but one year’s fashion of flared trousers may look stupid a
decade hence.

What some would seem to be doing is providing vouchers for
digital services, prepayments in other words. As governments have increasingly
turned to taxing transactions rather than tangibles, cryptocurrencies enable transactions
to be concealed, even if the underlying transaction is legal.

Without state endorsement, cryptocurrencies are a merry-go-round
of jugglers: they are based on trusting participants (players), who vouch for
each other anonymously (via distributed ledgers or blockchain), but who in the
aggregate are surely untrustworthy.

Libra from Facebook is somewhat different since it is would aim,
much as a bank, at being backed by a basket of holdings in different
currencies. It too would conceal transactions from the tax authorities. It aims
to be a means of payment only, without being a store of value.

It would undermine or replace local currencies, which may be
a good or a bad thing depending on the jurisdiction concerned.

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Radix is the radical centre think tank. We welcome all contributions which promote system change, challenge established notions and re-imagine our societies. The views expressed here are those of the individual contributor and not necessarily shared by Radix.

Comments

” Money is, first and foremost, for paying taxes, which are obligatory”

This is the MMT view of money! Money is essentially an IOU of government which creates them as they spend and destroy them as they tax. The Government can never get more money back in taxes than they have created in the first place which explains why they nearly all have deficits and debts.

The Government’s debt is therefore equal to everyone else’s savings.

It’s all quite simple really but, at the same time, it’s quite surprising how much misunderstanding there is.

Having worked professionally with language all my life, and always taking craftmanship care in my formulations. I am incensed that, not for the first time, an editor at Radix has, without consultation or approval, vandalised my text. Here just one example:
I wrote:
“Money stored long-term deteriorates, eventually becoming dead money, like grain and unlike socially or practically precious metals or indeed, in bygone times, salt.”
This now reads:
“Money stored long-term deteriorates, eventually becoming dead money, like grain and precious metals or indeed, in bygone times, salt.”
Hence producing almost the opposite of my meaning.
There are other distortions. In the next few days I shall attend to placing the authentic and complete texts on my personal websites.

The Author

Paul Gregory has published several essays, mainly on topics around love and relationships, and co-edited an anthology of papers on nations, cultures and markets. He was a founder member of the German business ethics network (DNWE–EBEN), which expelled him in 2014 for persistent whistleblowing. His Klasse Verantwortung – Weichenstellungen für eine starke Mittelschicht (“Responsibility with Class – Direction of Travel”) deals with political and ethical questions, including the concept of Fuzzy Democracy. He now lives in village south of Vichy.

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